SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
Pursuant to Section 13 or 15(d) of
the Securities Act of 1934
For the Quarter Ended Commission File
February 28, 1999 Number 0-19796
AIRTECH INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in charter)
Wyoming 98-0120805
- ------------------ ------------------
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
15400 Knoll Trail, Ste 106
Dallas, Texas 75248
(address of Principal Executive Offices)
972-960-9400
(Registrant's telephone number including area code)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes_____X____ No __________
The Registrant has 9,317,839 shares of common stock, par value $0.01 per
share issued and outstanding as of February 28, 1999.
Traditional Small Business Disclosure Format
Yes _____X_____ No __________
<PAGE>
Interactive Technologies Corporation, Inc.
Table of Contents
PART I - FINANCIAL INFORMATION Page No.
Item 1. Airtech International Group, Inc. 1 - 9
Financial Statements (Unaudited)
Balance Sheet as of February 28, 1999
Statement of Operations for the nine
months ended February 28, 1999 and 1998
Statement of Operations for the three
months ended February 28, 1999 and 1998
Statement of Cash Flows for the nine months
ended February 28, 1999 and 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K None
SIGNATURE PAGE 12
<PAGE>
Part 1-Financial Information
Item 1 Financial Statements
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
UNAUDITED
Assets
Current assets:
Cash $ 1,905
Accounts and note receivable, trade,
net of $30,080 of allowance for
uncollectible amounts 140,605
Inventories 236,624
Prepaid expenses and other assets 42,517
-------
Total current assets 421,651
-------
Property and equipment, at cost, net of
$283,725 of accumulated
depreciation 134,870
-------
Other assets:
Organizational costs, net of $3,984
of accumulated amortization 3,397
Net assets of discontinued operations,
Held for resale 3,463,762
Intellectual properties, net of $451,527
of accumulated amortization 21,846,094
Notes receivable, net of $0 of allowance
for uncollectible amounts 899,833
Other 531,772
Goodwill 6,487,072
----------
33,231,930
----------
Total Assets $ 33,788,451
=============
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
UNAUDITED
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade $ 411,617
Accrued expenses 77,276
Notes payable 66,748
Advances from officers 48,900
Current portion of license rights
payable 210,077
---------
Total current liabilities 814,618
---------
Long-term liabilities:
License rights payable 329,923
Notes payable 277,185
Deferred revenue 400,000
Deferred income tax payable 6,487,072
---------
7,494,180
---------
Commitments and contingencies: -
Stockholders' equity:
Preferred stock Series M, $.001
par value, 5,000,000 shares
authorized, 1,143,000, shares
issued and outstanding 1,143
Common stock, $.05 par value
50,000,000 shares authorized,
9,317,839 shares issued
and outstanding 465,892
Paid in capital in excess of par 37,819,189
Accumulated deficit (12,806,571)
------------
25,479,653
------------
$ 33,788,451
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
UNAUDITED
1999 1998
Revenue $ 759,586 $ 99
Cost of Goods Sold (459,376) -
------- --------
Gross income from operations 300,210 99
------- --------
Operating expenses:
Depreciation 51,300 16,242
Amortization 452,127 681,605
Advertising 28,084
General and administrative 1,955,948 340,176
Interest expense 181,226 36,793
------- ------
2,668,685 1,074,816
--------- ---------
Loss from operations ( 2,368,475) ( 1,074,717)
Estimated income taxes - -
- -
----------- -------------
Net loss $( 2,368,475) $( 1,074,717)
============= ==============
Net loss per share:
Basic $( .30) $( .36)
Diluted $( .30) $( .36)
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
UNAUDITED
1999 1998
Revenue $ 118,985 $ 3,427
Cost of Goods Sold (113,146) -
------- --------
Gross income from operations 5,839 3,347
----- --------
Operating expenses:
Depreciation 19,221 10,828
Amortization 146,846 454,403
Production costs 6,850 -
General and administrative 1,264,001 208,550
Interest expense 10,409 24,529
--------- --------
1,447,327 698,310
--------- --------
Loss from operations ( 1,441,488) ( 694,963)
Estimated income taxes 0 0
----------- ------------
Net loss $( 1,441,488) $( 694,963)
============= ============
Net loss per share:
Basic $( .18) $( .23)
Diluted $( .18) $( .23)
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS
Organization
Airtech International Group, Inc. (the Company) was incorporated in the
state of Wyoming on August 8, 1991 as Interactive Technologies Corporation, Inc.
On May 31, 1998, the Company acquired all of the outstanding common stock shares
of Airtech International Corporation, Inc. ("AIC"), which through its
subsidiaries manufacture and sell various air filtration and purification
products. The total purchase price of $22,937,760 was funded through the
issuance of 10,500,000 of its common stock shares valued at $.625 per share, the
issuance of 11,858,016 of its Series A convertible preferred stock shares valued
at $.625 per share and the issuance of $9,000,000 of convertible debentures.
The transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price of the net assets acquired has been allocated
among the net assets based on their relative fair values with $22,297,684 of the
purchase price allocated to intellectual properties based on an independent
asset appraisal.
On July 31, 1998 the Board of Directors of the Company exercised its option
and converted the convertible debentures and Series A preferred stock by issuing
24,929,440 shares of its unissued common stock. On October 5, 1998, the
Company's shareholders approved a 5 for 1 reverse split of the Company's common
stock.
Consolidated principles
The accompanying consolidated financial statements include the general
accounts of the Company, Syneractive Technologies and AIC and its subsidiaries
for the nine months and three months ended February 28, 1999. All material
intercompany accounts and balances have been eliminated in the consolidation.
Impairment of long-lived assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used, and long-lived assets and certain identifiable intangibles to be
disposed of. The Company periodically evaluates, using independent appraisals
and projected undiscounted cash flows, the carrying value of its long-lived
assets and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In addition, long-lived assets and identifiable intangibles
to be disposed of are reported at the lower of carrying value or fair value less
cost to sell.
Amortization
Organizational costs are being amortized using the straight-line method
over five years.
License rights are being amortized over the initial five-year term of the
licenses. Although they are renewable at no additional consideration, there is
no guarantee the Company will renew these licenses. At fiscal year ended May 31,
1998 these assets were reclassified as assets of discontinued operations, held
for resale. For the nine months ended February 28, 1999 no additional
amortization was booked.
5
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS (continued)
Inventories
Inventories are carried at the lower of cost or net realizable value
(market) and include component parts used in the assembly of the Company's line
of air purification units and filters and finished goods comprised of completed
products. The costs of inventories are based upon specific identification of
direct costs and allocable costs of direct labor, packaging and other indirect
costs.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is currently being provided by straight
line and accelerated methods for financial and tax reporting purposes,
respectively, over estimated useful lives of five years.
Capitalized software expenditures
Software and trademark costs are amortized, pursuant to Statement of
Financial Accounting Standards No. 86, at an annual amount equal to the greater
of the amount computed using (a) the ratio that current gross revenues bear to
the total of current and anticipated future gross revenues or (b) the
straight-line method over a seven year estimated economic life beginning April
18, 1996. At May 31, 1998 these assets were reclassified as assets of
discontinued operations, held for resale.
No amortization was booked for the nine months ended February 28, 1999.
Intellectual properties
In its acquisition of AIC the Company purchased certain intellectual
properties. Costs incurred by the Company in developing its products consisting
primarily of design, testing and completion of working prototypes, which are
considered patentable, are capitalized and will be amortized over the estimated
useful life of the related patents once a unit has been placed in production.
Accordingly, the Company amortized intellectual properties by $451,527 during
the nine months ended February 28, 1999 for units placed in production.
Revenue recognition
Sales are recorded at point and time of shipment
Advertising
The Company's advertising costs, which consist of radio airtime for the
Rebate TV operations, are charged to expense when incurred.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash flow
For purposes of the statement of cash flows, cash includes demand deposits
and time deposits with maturities of less than three months. None of the
Company's cash is restricted.
6
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS (continued)
Basis of financial presentation
Basic and diluted earnings per share amounts are based upon 7,825,200 and
2,974,034, respectively, for nine months ended February 28, 1999 and 1998,
weighted average shares of common stock and common stock equivalents
outstanding. No effect has been given to the assumed exercise of stock options
and warrants as the effect would be antidilutive.
The accompanying unaudited consolidated financial statements have been
prepared by Airtech International Group, Inc. (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although management
believes that the disclosures are adequate to make the information presented not
misleading, it is suggested that these interim consolidated financial statements
be read in conjunction with the Company's most recent audited consolidated
financial statements and notes thereto. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the interim periods presented have been made. Operating results for
the interim periods presented are not necessarily indicative of the results that
may be expected for the year ending May 31, 1999.
Stock Based Compensation
The Company measures compensation cost for its stock based compensation plans
under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." The difference, if any, between the
fair value of the stock on the date of grant over the exercise price for the
stock is accrued over the related vesting period. SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires companies electing to continue
to use APB 25 to account for its stock-based compensation plan to make pro forma
disclosures of net income and earnings per share as if SFAS 123 had been applied
(see Note J).
Earnings Per Share
Effective December 15, 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." Statement No. 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Under the new requirements for calculating earnings
per share, the dilutive effect of stock options and other dilutive instruments
will be excluded from basic earnings per share but included in the computation
of diluted earnings per share. All earnings per share amounts have been restated
so as to comply with Statement No. 128.
Accounting Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management must make estimates based on future
events that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements, and revenues and expenses during the
reporting period. Actual results could vary from the estimates that were used.
In particular, management continually reviews the allowance for doubtful
accounts. In considering the total allowance for doubtful accounts, management
considers the payment history, underlying collateral value, and ability of the
optical practices to support the required payments to the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
7
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS (continued)
Adoption of New Accounting Standards
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, in the first quarter of 1998. If
applicable, the Company will present a new Consolidated Statement of
Comprehensive Income which will report all changes in the Company's
stockholders' equity other than transactions with stockholders. Comprehensive
income pursuant to SFAS No. 130 would include the Company's consolidated net
income, as reported in the Consolidated Statement of Operations, plus the net
changes in the marketable securities, foreign currency translation and pension
liabilities components of stockholders' equity. Management does not believe this
statement will have an impact on its consolidated financial statements.
The Company will adopt SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, for the purposes of its annual financial statements
effective for the year ending December 31, 1998. SFAS No. 131 will supersede the
business segment disclosure requirements currently in effect under SFAS No. 14.
SFAS No. 131, among other things, establishes standards regarding the
information a company is required to disclose about its operating segments. SFAS
No. 131 also provides guidance regarding what constitutes a reportable operating
segment. The Company is currently evaluating the required segment disclosures
pursuant to SFAS No. 131.
The Company will adopt the disclosure requirements of SFAS No. 132, Employer's
Disclosures about Pensions and Other Post-retirement Benefits, in the fourth
quarter of 1998. SFAS No. 132 revises disclosure requirements for such pension
and post-retirement benefit plans to, among other things, standardize certain
disclosures and eliminate certain other disclosures no longer deemed useful.
SFAS No. 132 does not change the measurement or recognition criteria for such
plans. Management does not believe this statement will have an impact on its
consolidated financial statements.
NOTE 2 - DEFERRED COMPENSATION
On January 31, 1999, the Company's Board of Directors approved the issuance of
1,583,332 shares of the Company's restricted common stock in payment of deferred
compensation owed to the Company's CEO and its President. As identified in the
Company's 10K for May 31, 1998, the Company is obligated under employment
agreements with both the CEO and the President for annual compensation of
$250,000 apiece. Neither officer had received compensation for the period from
June 1, 1997 through December 31, 1998 for deferred compensation totaling
$791,666. In full settlement of the obligation for compensation deferred over
this period, 1,583,332 shares were issued at $0.50 per share. The obligation had
not been previously recorded and resulted in an increase to General and
administrative expenses for the three months ended February 28, 1999.
8
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 3 - YEAR 2000
The Company believes all of its current computer systems and applications are
Year 2000 compliant. In 1998, the Company plans to add point-of-sale software
throughout its managed and owned stores, and this software will be Year 2000
compliant. The Company is currently investigating for compliance other
significant systems upon which it relies. Management does not believe that its
cost of complying for the significant systems will be material to the financial
condition of the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The Company's operations for the nine months ended February 28, 1999,
resulted in a net loss of $2,368,475, or $0.30 basic loss per share, compared to
a net loss of $1,074,717, or $0.36 basic earnings per share, for the comparable
period in 1998.
The Company, entirely through its wholly-owned subsidiary, Airtech
International Corporation, Inc. ("AIC") had sales of $759,586 for the nine
months ended February 28, 1999 primarily composed of approximately $275,000 of
sales of air purification equipment and approximately $400,000 of HVAC
contracting and installation and replacement of air filters, compared to Company
sales of $99 for the comparable nine months of 1998, an increase of $759,487.
The Company also sold five new franchises in 1999.
Airtech sales of air purification equipment reflect initial market
penetration and acceptance of newly introduced units. The Company has had
success selling equipment into businesses with existing or pending bans on
smoking, such as hotels and restaurants. The Company continues to expect its
Model 950 being developed as a Class II Medical Device for Medicare recipients
will be approved and ready for sale into that market during calendar year 1999.
Production of the Series 999 automobile unit for pre-sales customer testing is
occurring in the spring of 1999 with orders expected before fiscal year end.
Since its inception and during the research and development phase, the Company
shipped air purification units to more than one-hundred customers. The Company's
products continue to have a high rate of acceptance among the commercial
accounts to which the Company markets and while beta testing its new models.
Cost of Goods Sold was $459,376 compared to $0, for the nine months ended
February 28, 1999 and 1998, respectively. The Company wrote down $80,000 of
obsolete inventories at February 28, 1999 resulting in cost of goods for the
nine months at 60% of sales. Without the adjustment, cost of goods sold would
have been 50% continuing toward Management's belief that cost of goods sold as a
percent of sales will decrease to approximately 40% in the future as sales of
air purification equipment comprises a larger percent of the Company's sales.
Operating expenses increased $1,593,869, or 148% for the nine months ended
February 28, 1999 compared to the same three quarters in 1998. The increase is
attributable to recording approximately $800,000 in deferred compensation owed
to two of the Company's officers, an approximately $150,000 increase in interest
expense payable to holders of debentures issued in the Airtech merger and
approximately $775,000 increase in general and administrative expenses. The
increase in G&A was attributable to the increased size of wages, advertising, an
increase in reserve for doubtful accounts and consulting expenses incurred by
the AIC subsidiary.
The results of operations for the three months ended February 28, 1999
compared to February 28, 1998 are largely comparable to the results of
operations for the nine months ended February 28.
The Board of Directors continues to consider various business plans on
moving forward with the Company's subsidiary, McCleskey Sales and Service
("MSS"). Due to historical losses at the subsidiary, the Company terminated the
positions of the president and staff of MSS effective September 30, 1998. The
Company expects to resolve this issue by fiscal year end.
Liquidity and Capital Resources
During the nine months ended February 28, 1999, the Company continued to
fund operations through revenues, private sales of securities and paying certain
debts and business services in Company common stock. As of February 28, 1999,
the Company had invested $377,229 in accounts receivable and inventory, an
increase of $377,229 over February 28, 1998. Likewise, trade accounts payable
increased $333,355 between the two periods.
In June 1998, the Company sold 530,000 shares of its common stock for
$106,000. Another 750,000 and 50,000 shares were issued for business services
and in settlement of debts, respectively. In January, 1999, the Company's
subsidiary, Airsopure, Inc., entered into an agreement to become the General
Partner of the Airsopure 999 Limited Partnership. The LP, a Texas limited
partnership, is not affiliated in any way with the Company or its subsidiaries.
The LP has been designed to raise up to $5,000,000 to fund development,
marketing and production of the Company's trunk mounted automobile unit, the
S-999.
10
<PAGE>
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 Statements contained in this document which are not historical fact are
forward-looking statements based upon management's current expectations that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
These risks are described in the Company's Form 10-KSB for the fiscal year ended
May 31, 1998 filed with the Securities and Exchange Commission.
11
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on April 14, 1999.
AIRTECH INTERNATIONAL GROUP, INC.
by: /s/ CJ Comu
-----------------------------------
CJ Comu, Chief Executive Officer
12
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-21-1999
<PERIOD-START> DEC-01-1999
<PERIOD-END> FEB-28-1999
<CASH> 1,905
<SECURITIES> 0
<RECEIVABLES> 170,685
<ALLOWANCES> (30,080)
<INVENTORY> 236,624
<CURRENT-ASSETS> 421,651
<PP&E> 418,595
<DEPRECIATION> (283,725)
<TOTAL-ASSETS> 33,788,451
<CURRENT-LIABILITIES> 814,618
<BONDS> 0
0
1,143
<COMMON> 465,892
<OTHER-SE> 25,012,618
<TOTAL-LIABILITY-AND-EQUITY> 33,788,451
<SALES> 759,586
<TOTAL-REVENUES> 759,586
<CGS> 459,376
<TOTAL-COSTS> 459,376
<OTHER-EXPENSES> 2,487,459
<LOSS-PROVISION> 0
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